by Jason Bodner
October 15, 2024
I love quantitative investing. It removes emotion from investing, so I can live my dream: writing financial algorithms while listening to Bach instead of CNBC talking heads.
Painfully boring, right? Bach might not be your top Spotify choice. Nerdy? Maybe. Popular? Not at all. But, popularity isn’t always healthy for your investing results.
Financial news hosts love to bring forth “experts” to opine on the markets’ future. While it may be fun focusing on these live on-air debates, it’s mostly noise. I don’t think it helps us achieve much success.
It does, however, gather audience eyeballs so that advertisers can get their message to precious eyes and ears. After all, the media business model is not to make you a great investor, it’s to generate ad revenue.
This crystallized for me when I viewed one of my heroes on CNBC in 2013.
David Harding founded Winton Capital in 1997 with just $1.7 million. His view was to grow a business based on scientific research and no marketing. He grew it to become one of the top quantitative research funds in the world. Winton currently manages $12 billion. Specific returns are hard to find, but one journal in 2005 showed a CAGR of 21.47% since inception. That implied a 4.7-fold increase on capital.
Harding is now a billionaire, so it seems like we would want to listen to this guy, right? But when I saw his CNBC clip, I knew this investing genius wouldn’t be invited back any time soon, if at all.
Here’s why: in this 2:23 clip, he was grilled about macro events. Asked if his system predicts the price of gold, he replied bluntly,“It doesn’t give us any good guidance, sadly, in any markets at all, ever.”
The interview concluded with a thud, like this:
Joe Kernan, CNBC: “Can you tell us any big major macro things going on that the past has told us that might be going on right now?”
David Harding: “No, no, I can’t.”
Joe Kernan: “Does the dollar lose its king status eventually?
David Harding:“No, I mean we have no knowledge or information from our computer systems like that.”
That’s the end of the interview. I can almost see the producers telling Joe to cut this interview short. And, sure enough, searching “David Harding on CNBC,” you can count his appearances on one hand.
David Harding didn’t give any sexy soundbites, scandals, or anything juicy. It was dry, boring and factual: His system had only a slight edge, and he used it to make money regardless of what the headlines said.
The truth is that his unsensational wisdom may never be popular … even if it holds the keys to success.
For me, investing success lies in the data, not the media. It reminds me of another story: Nicolas Darvas, a professional dancer in the 1950s, started with no training, a dancer and an amateur investor, but he made $2 million in 1958; $21 million in today’s money. He designed Darvas boxes, which look like this:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Applying those Darvas boxes to our own Big Money Index (BMI), we see strong correlation. When the value rises or drops outside of a box, we see future trends developing:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Currently, we are in a tight box. What’s next is not clear: We can break down or break out.
Unusual buying has been dwindling while unusual selling is picking up slightly:
That helps explain the sideways BMI. Another near-term concern is that volume is waning:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Add in the fact that we are in October and a Presidential election nears, and we shouldn’t be surprised if we see volatility. Until October 15, history says to expect choppiness, but afterwards expect rising prices:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Election years complicate expectations, as average returns are negative in the back half of the month:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This history indicates that an October Surprise before the election could bring volatility. All that data indicates that the market is pausing, at least for now. We see this echoed in the sector charts.
First, let’s check in on the strength and weakness table. Technology rose again to regain the top spot. With Industrials and Discretionary not far behind, this is constructive for the long-term bull market. (More on that later, but for now we notice that growth sectors are moving higher).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The main takeaway when looking at the 11 individual sectors (below) is that seven sectors have retreated from their highs. Technology, Financials, Industrials, and Communications are at highs, while the other seven sectors have cooled slightly after a strong rise. The positive underlying data show that only Health Care is experiencing any selling of note. The strong sectors powering the recent rally echo the market overall, as we see the recent slowdown is mainly due to a decline in unusual buying.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Technology, Industrials and Discretionary growth sectors are rocket fuel for a long uptrend. They are growth sectors. And, with the small-cap driven rally recently, this is especially bullish for the next 24 months.
When we account for falling rates and record cash levels, the setup is clear: Stocks are going higher.
First, we see that the Fed funds effective rate is finally starting to fall and chase the falling CPI.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That dark blue line starting to fall tells us that rates are collapsing. They will continue to fall in money market cash accounts. As they do, that cash will chase returns elsewhere, which makes this a good time to revisit the chart of money market funds, which are currently at records highs above $6 trillion.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As cash earns less interest, investors will flood into stocks, specifically smaller and mid-sized companies.
In summary, quantitative analysis removes emotion and lets us take facts for what they are. This approach led David Harding to turn $1.7 million into $12 billion and become a billionaire. It also led him to be an unpopular and infrequent TV guest. I say, let TV do what it does best: entertain. But when it comes to investing, go with cold hard data. What’s popular isn’t necessarily effective, but popularity can be fun.
Desmond Tutu said: “Most of us would prefer to be popular than unpopular.” He was right, but Vivienne Westwood said it better: “The only possible effect one can have on the world is through unpopular ideas.”
The post 10-15-24: Why the Media Don’t Want You to Know the Truth about Their Reporting appeared first on Navellier.
